This month's white paper will discuss the slow-and-steady road to investment success,
particularly when the terrain gets bumpy. I hope it's not a secret, but the farther you
fall, the harder it is to climb back up. This universal truth is painfully apparent in the investing world, as
illustrated here: We call it 'win more by losing less.'
THE SIMPLE (AND PAINFUL) MATH OF INVESTMENT LOSSES
The chart to your right, is one reason why
at WT Wealth Management we much prefer
a "steady-as-she-goes" path to investment
returns. This chart illustrates that a 10% loss in
your portfolio, while may be uncomfortable
to endure, it only takes a 11% gain to recover
from that 10% drawdown. In many cases,
based on past recoveries, that could be done
in 6-12 months or even as few as several
months. In late 2015 and early 2016 we
witnessed just that. From November 2, 2015
to February 8, 2016 the S&P 500 declined just
over 11% and by May 23rd we had recaptured
that entire loss. By early July we had set an
new all-time on the S&P 500. From that low
pint in February of 2016 we have added on
nearly 30% to the S&P 500 as of May 5, 2017.
On the other hand, a 30% loss requires a 43% gain which obviously would take a substantially longer duration
to recover from. While our approach might mean giving up some blockbuster numbers during equity market
booms, it can also mean a potentially less treacherous fall on downturns. In the long run, that patient, steady
(and studied) approach can be more successful for our clients.
WE CALL IT 'WIN MORE BY LOSING LESS.'
Drawdown protection is a particularly important dynamic when markets are volatile, which is what we expect
for the remainder of this year. A portfolio built with some "buffers" is better equipped to weather those
drawdowns and deliver superior results over full-market cycles, which typically take 5-7 years to be fully
According to a recent study by Isaac Braley, president of BTS Asset Management of Lexington, Mass., 75
percent of a group of surveyed advisors emphasized capital preservation as a primary concern among investor
clients. In addition, 45 percent said clients were mainly concerned about losses on equity investments, and 30
percent said clients were worried that their investments would not yield them sufficient returns to last them
the rest of their lives. Furthermore, 99 percent said clients tended to buy an exchange-traded fund (ETF)
based on its track record rather than its brand name.
If that were only true.
If we had the opportunity to do so, we would challenge other advisors on their stated criteria for purchasing
ETFs. We commit to looking at industry asset flows every week, and we always find most fund flows channeling
into the most prominent fund names, who are not necessarily the highest performers. Clearly the advisors in
that survey want fund managers to reprise the actions they took in other strategies that apparently account
for the success of those big brand names.
At WT Wealth Management, we believe those advisors are mistaking brand for track record. As a researchdriven
firm, we do not care about names. For we can best serve you, our clients, by not even looking at the
names of the firms that sponsor our investment products. We crunch the numbers alone, and from only those
numbers we determine where we believe the best upside participation may be coming from while protecting
our downside participation.
We have understood the importance of consistent and hair-like returns for over a decade. During the financial
crisis of 2008–2009, many investors had just broken even from the tech bubble of 2000–2001, when the
financial disaster first struck. Our mantra has always been:
PARTICIPATION IN RISING MARKETS
OUT-PERFORMANCE IN DECLINING
MARKETS PRESERVE CAPITAL
How do we accomplish that? For years we have observed that a key statistic in selecting an investment is upside/
downside capture ratio, which measures the degree to which a fund has underperformed or outperformed a
market benchmark based on monthly returns during periods of market highs and lows.
If a fund's increase parallels that of the benchmark, the fund's upside capture is 100 percent. If the upside
capture is 120 percent, then the fund rose 20 percent above the benchmark. An 80 percent ratio means the
fund captured only 80 percent of the positive returns the benchmark enjoyed. Downside capture, however,
compares the returns of a fund to the proper benchmark's negative returns in a particular fiscal period. A 2
percent decrease in a fund's returns while the benchmark has lowered 2 percent yields a 100 percent downside
capture. If the downside capture were 80 percent, then the fund would fall 8 percent were the market to drop
10 percent. A 120 percent downside capture denotes that a 10 percent benchmark decline would give the fund
a 12 percent loss, or a 20 percent greater loss than that of the benchmark.
When we head out on the road, we learn more and more about our client's misconceptions. We take considerable
time to explain to clients what it means for us at WT Wealth Management to take a measured approach to
investing and to implement strategies to protect principal but still grow capital. We love it when lightbulbs go
off and clients see our proven, measured approach to long-term wealth accumulation.
At WT Wealth Management, we had always believed that this approach was the best way to grow account
values by limiting drawdowns. Then something exciting happened. This past February we attended the TD
Ameritrade conference in San Diego and participated in a session with BlackRock Investments, the world's
largest asset manager with $5.1 trillion —yes, that's trillion—under management.
A leader in creating low-volatility ETFs, BlackRock recently completed a study examining upside/downside
capture ratios. They found that, since 2000, if you captured only 73% of every upside move and participated
in 73% of every downside move, then you would have outperformed the S&P 500, and that 73/73 was the
ultimate, perfect sweet-spot after looking at every combination from 1/1 to 100/100.
To us at WT Wealth Management, this reconfirmed that we had been on the right path for the past several
years. It was an exciting turn of events for us.
Upside/downside capture ratio, in our opinion, is the most important but most overlooked statistic in mutual
fund or ETF selection, for building a strong foundation and a stable base is fundamental to what we do.
At WT Wealth Management, we screen hundreds of ETFs to identify those with exceptional upside/downside
capture ratios, exposure to sectors and industries we find most attractive, and low internal expenses. Every
investor—large or small, aggressive or conservative, old or young—starts with these exceptional ETFs as a
base, and then we branch outward to personalize your portfolio and deliver returns in accordance with your
personal risk profile, time horizon and investment objectives.
When I show clients an ETF that has captured 110% or 120% of the upside and 65% or 70% of the downside of
each S&P 500 move over the last three years, they think I have found the "holy grail." The truth is, I have—but
only for a fleeting moment. I've seen the trailing one-year capture ratios flip-flop from super-good (150/50) to
super-bad (50/150) in only three or four months. Nothing lasts forever, and the markets will become growthbiased,
value-biased, momentum-biased, or defensive-biased in just a few short weeks. An ETF that seemed
like easy pickings one year will be a thorny bush the next year.
So the moral of the story is: Don't expect every dollar of every upside move—but don't worry, you won't get
every dollar of every downside move either. As the BlackRock study showed, if we can deliver a total capture
ration on your portfolio in the 75% range, then we can outperform the S&P 500. The truth of the matter is, our
expectations are higher, and we strive to obtain 80-85% of every upside move and 60-65% of every downside
move, thus to generate return that surpasses even the 73/73 that Blackrock determined to have been the
upside/downside sweet-spot since 2000.
WIN MORE BY LOSING LESS.
WT Wealth Management is a manager of Separately Managed Accounts (SMA). Past performance is no indication
of future performance. With SMA's, performance can vary widely from investor to investor as each portfolio is
individually constructed and allocation weightings are determined based on economic and market conditions
the day the funds are invested. In a SMA you own individual ETFs and as managers we have the freedom and
flexibility to tailor the portfolio to address your personal risk tolerance and investment objectives – thus making
your account "separate" and distinct from all others we potentially managed.
An investment in the strategy is not insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
Any opinions expressed are the opinions of WT Wealth Management and its associates only. Information is neither
an offer to buy or sell securities nor should it be interpreted as personal financial advice. You should always seek
out the advice of a qualified investment professional before deciding to invest. Investing in stocks, bonds, mutual
funds and ETFs carry certain specific risks and part or all of your account value can be lost.
In addition to the normal risks associated with investing, narrowly focused investments, investments in smaller
companies, sector ETF's and investments in single countries typically exhibit higher volatility. International,
Emerging Market and Frontier Market ETFs investments may involve risk of capital loss from unfavorable
fluctuations in currency values, from differences in generally accepted accounting principles or from economic or
political instability that other nation's experience. Emerging markets involve heightened risks related to the same
factors as well as increased volatility and lower trading volume. Bonds, bond funds and bond ETFs will decrease in
value as interest rates rise. A portion of a municipal bond fund's income may be subject to federal or state income
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